This article introduces you to an unique themed fund. This fund will not only provide you with global diversification but also let you profit from rising food prices

Author : Manjunath Gaddi

If life throws lemons at you, learn to make lemonade!

The
increase in the prices of
food items continues to be a persistent problem for the economy. The
political
turmoil in North Africa and Middle East has already raised the crude
oil prices
which will again lead to higher fuel prices. All these factors are
leading to
increased cost of living and people would have to pay more from their
pockets. Thus,
inflation is a cause of concern to everyone, the policy makers, the
common man and
investors too.

Inflation
impacts in
following ways:

Increases
your
livelihood
expenses thereby, reducing the investment money available with you

Also,
eats into
the ‘real’ returns earned by your investments. Real
returns are the returns
earned by your investments minus the rate of inflation. So, on a given
date
havinga certain
rate of return on your
investments means a higher inflation rate would give way to lower real
returns

High levels of
inflation generally forces the central bank of that country (RBI, in
our case)
to hike interest rates which impacts equities and debt assets

Food Inflation: A cause of
concern

One of the
contributors
to high inflation
in India is the persistent rise in the prices of food articles.
However, food
inflation is not localised to India but is impacting the whole world.
The
chart 1 on the side, shows the rate of food price increase across the
world, as
seen
by the
sharp rise in the FAO Food Price Index published by the UN Food and
Agriculture
department and the rise is much higher in comparison to that of India.

Chart 1: Food price
increase
in India and World

Food
Inflation:
an opportunity to profit

There
are very few
products
available in the India that could help an investor profit from food
inflation.Here, either you will
have to use commodity
futures from the commodity exchanges or you can consider DWS Global
Agribusiness Offshore fund.

DWS
Global Agribusiness Offshore fund

The
DWS Global
Agribusiness
Offshore fund (offshore fund) is an overseas Fund of Funds (FoFs) which
invests
into DWS Invest Global Agribusiness Fund (underlying fund). The
offshore fund
is managed in India by Aniket Inamdar and Kumaresh Ramakrishnan and the
underlying fund is managed by Dr. Oliver Kratz. The
offshore fund was incepted in India on 14
May 2010. The underlying fund does not have a benchmark. However, in
India the
fund has MSCI World Index as the benchmark following SEBI norms which
state
every fund to have a benchmark.

Investment
Theme

The
fund’s
agriculture oriented
theme is based on investing in businesses that service and earn profits
from
increasing global population, rising income of the people (especially
in the
developing world)and limited land/water resources. All these factors
will help
companies orient themselves towards the agriculture sector to earn
profits in
the long run.

This
underlying fund does not
seek to profit by investing into futures of food commodities, as this
would
increase food prices and can be the cause of socio, economic and
political
crisis across the world. However, the fund seeks to profit from the
increase in
the share prices of agriculture related companies. The fund will invest
in
companies that profit from the agriculture sector i.e., right from seed
and
fertilizer manufacturer to supermarkets.

Performance

Although,
the offshore
fund has a
history
of less than one year, it has already outperformed SENSEX and MSCI
World Index (in INR) by good margin. As at 25 March 2011,
this fund
has given 20.3% since its inception, while SENSEX and MSCI World Index
have
given 9.0% and 14.0% since the fund’s inception.
The chart
below
shows the performance of the fund against the performance of SENSEX and
MSCI World.

Portfolio
Composition

As at
January
2011 end, the
underlying fund has allocation of more than 56% in companies
incorporated in
US, Switzerland, Brazil and Canada. India
does not figure in the top 10 countries.

Syngenta,
Monsanto, Archer Daniel
Midland, Viterra and Bunge are the top five companies that this fund
has
invested into with these five companies accounting for 28.5% of the
portfolio.
Monsanto is a seed producer, Syngenta is a herbicide / an
insecticide
company,
Archer Daniel Midland, Bunge and Viterra are food grain procurers,
transporters
and processers.

Conclusion

One
can
consider investing in
this fund considering two perspectives; ‘theme based
diversification’ and ‘geographical
diversification’.

Chart
2: Performance of DWS
global Agribusiness
offshore
fund along with SENSEX and
MSCI World
Index

The fund is based
on the
agricultural
theme,
which is unique
in India with none of the domestic funds offering a similar theme.
Additionally, the agriculture theme is expected to do well on a global
scale in
the future considering the increasing problems in living conditions.
The
current increase in food prices will increase the cash flows of
companies in
the agriculture space and ultimately, increase in profits. This would
benefit
the investors investing in this fund and the agricultural space.

In terms of
geographical
diversification, the fund is investing into companies related to
agriculture across
the world. Since, India does not figure out in the top 10 countries,
the
investor in this fund will also accrue diversification benefits. This
is seen
in the level of correlation between the daily fund returns and that of
SENSEX.
The fund’s daily returns have 25.7% correlation with the
SENSEX’s daily returns
whereas domestic equity fund has a higher degree of correlation with
the
SENSEX’s movements.

Manjunath
Gaddi is an Analyst with iFAST
Financial India Pvt Ltd.

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